INTEREST OF THE SECURITIES AND EXCHANGE COMMISSION

The Securities and Exchange Commission is the agency principally responsible for the administration and enforcement of the federal securities laws, including the Securities Act of 1933, 15 U.S.C. 77a, etseq., and the Securities Exchange Act of 1934, 15 U.S.C. 78a, etseq. As part of its jurisdiction, the Commission has pervasive regulatory authority over public offerings of securities and over the relationship between securities broker-dealers and their customers. It is specifically granted broad authority to regulate stabilization activity, i.e., efforts to peg or fix the price of a security at a particular level.

Plaintiffs in this case urge that certain conduct by underwriters aimed at preventing the quick re-sale of a newly offered security, called "flipping," violates the antitrust laws. That conduct falls squarely within the Commission's regulatory jurisdiction over stabilization, an area where the Commission has actively exercised its authority. The Commission has, however, to this point not subjected this conduct to specific regulation as stabilization. Determining the legality of this conduct must take into account not only issues of competitive restraint but also the purposes and policies of the federal securities laws. The Commission should retain its ability to decide the extent, if any, to which the conduct should be prohibited or regulated in light of those purposes and policies. Conduct is immune from antitrust liability if application of the antitrust laws would interfere with that regulatory responsibility. In the Commission's view, under that standard, the conduct is immune from antitrust challenge.

STATEMENT OF THE CASE

This case arises in the context of fixed-price, firm commitment underwriting of securities issues. Under the complained of conduct, an underwriter or syndicate of underwriters under the direction of a managing underwriter purchases the issued securities from the issuer and then undertakes to resell them quickly to the public at a fixed offering price. 1

If the price of the security were to drop during the offering period, the members of the syndicate could find themselves either unable to sell the entire issue, or they could be forced to take a loss. Furthermore, a price drop may be caused by the offering process itself, as a large new supply of the securities is placed on the market at once. Consequently, underwriters developed the practiceof pegging, fixing or stabilizing the price of securities during the offering by buying shares in the market at or slightly below the offering price.

As explained in more detail below, the stabilizing activity that is most often discussed is purchases or bids by members of an underwriting syndicate during the distribution phase of an offering. That activity, however, is not restricted to underwriters. There is a variety of other conduct that may be characterized as stabilization in connection with an offering and which can take forms other than purchasing or bidding on the open market. Clearly, stabilization is a form of "manipulation" of the price of securities, but it is a form that has arguable benefits as well as dangers. When Congress passed the Exchange Act, it determined that stabilization should be subject to regulation rather than prohibited outright, and it gave the Commission broad authority over the conduct.

Plaintiffs allege that defendant underwriters engage in certain conduct for the purpose of stabilizing the price of newly offered securities in the period immediately after the offering of those securities has been concluded, which they refer to as the Retail Restricted Period. The complaint describes the alleged conduct only generally, but plaintiffs appear to focus on the claim that defendants entered into an agreement among themselves to discourage retail customers fromflipping newly offered securities by telling those customers that if they flipped, they would not be offered the opportunity to purchase shares in future offerings, thereby foreclosing what was perceived to be opportunities for substantial profits. The district court treated this conduct, which it called "privilege revocation" (Op. 5), 2 as the gravamen of the complaint, and plaintiffs' brief in this Court does not take issue with that view.

Plaintiffs claim that defendants threatened retail customers, but not institutional customers, with privilege revocation for four reasons: First, defendants use their own capital to support the price of securities during the Retail Restricted Period, and, to the extent retail investors are discouraged from selling, less support is required. Second, the conspiracy maintains an inflated price for the market into which institutional customers, but not retail customers, may sell. Third, maintaining the market allows the underwriters to sell over-allotment allocations of securities they receive as part of the offering. 3 Finally, stock price performance during the Retail Restricted Period is a competitive factor considered by issuers in selecting underwriters, so successful stabilization during this period may lead to more business in the future (Complaint ¶ 11(e), JA 188).

Plaintiffs contend that this conduct violates the antitrust laws because it amounts to a contract, combination or conspiracy to fix prices (Complaint ¶ 3, JA 184).

ARGUMENT

I. THE ANTITRUST LAWS ARE IMPLIEDLY REPEALED TO THE EXTENT NECESSARY TO ALLOW CONGRESSIONALLY CREATED REGULATORY REGIMES TO FUNCTION PROPERLY.

The general principles governing implied immunity are well-established. While the antitrust laws represent a fundamental national economic policy, Congress is deemed to have repealed those laws by implication in enacting statutes creating a regulatory system when there is a "a convincing showing of clear repugnancy between the antitrust laws and the regulatory system." National Gerimedical Hospital and Gerontology Center v. Blue Cross of Kansas City, 452 U.S. 378, 388-89 (1981). Repeal is "implied only if necessary to make the subsequent law work, and even then only to the minimum extent necessary." Id. "Intent to repeal the antitrust laws is much clearer when a regulatory agency hasbeen empowered to authorize or require the type of conduct under antitrust challenge." Id., citingUnited States v. National Association of Securities Dealers, 422 U.S. 694, 730-34 (1975); Gordon v. New York Stock Exchange, 422 U.S. 659, 689-90 (1975). SeealsoFinnegan v. Campeau Corp., 915 F.2d 824 (2d Cir. 1990) (reviewing antitrust immunity under the securities laws, and discussing the Gordon and NASD decisions) and Strobl v. New York Mercantile Exchange, 768 F.2d 22 (2d Cir. 1985); seegenerally 1A Phillip E. Areeda and Herbert Hovenkamp, Antitrust Law 34-61 (2d ed. 2000).

The Gordon and NASD decisions cited by the Court in National Gerimedical are especially relevant in analyzing how the immunity doctrine applies to the allegations in this case. In Gordon, the Court found that stock exchange rules fixing commission rates that had been approved by the Commission were not subject to the antitrust laws because the Commission was authorized by the Exchange Act to approve fixed commission rates, the Commission had actively reviewed and approved those rates for many years, and Congress had recently enacted a statute explicitly giving the Commission authority to approve fixed commissions in the future. The Court concluded that the Exchange Act "was intended by the Congress to leave the supervision of the fixing of reasonable ratesof commission to the SEC," so that "[i]nterposition of the antitrust laws, which would bar fixed commission rates as per se violations of the Sherman Act, in the face of positive SEC action, would preclude and prevent the operation of the Exchange Act as intended by Congress and as effectuated through SEC regulatory activity." 422 U.S. at 691. Therefore, implied repeal was "in fact, necessary to make the Exchange Act work as it was intended" because "failure to imply repeal would render nugatory the legislative provision for regulatory agency supervision of exchange commission rates." Id.

In the NASD case, discussed in more detail below, the Court found that Congress had repealed the antitrust laws with respect to certain restrictions on negotiability and transferability imposed on mutual fund shares by the issuers of those shares. It also found immunity with respect to conduct of the National Association of Securities Dealers that was intended to facilitate those restrictions, even though the Commission had not adopted any regulations governing the conduct.

II. ANTITRUST IMMUNITY FOR THE CHALLENGED CONDUCT IS NECESSARY TO EFFECTUATE THE PURPOSES OF THE FEDERAL SECURITIES LAWS.

As described by plaintiffs, privilege revocation is one of the practices used by underwriters to stabilize the price of newly offered securities once the shares have been sold. The offering process in general, and the stabilization of newly offered securities in particular, are subject to pervasive regulation by the Commission. Indeed, for over 60 years the Commission has had rules regulating stabilization during an offering, although no Commission rule explicitly prohibits privilege revocation under the circumstances described by plaintiffs. Plaintiffs' efforts to challenge privilege revocation under the antitrust laws, if successful, could displace the Commission's decision not to regulate or ban the conduct with a flat prohibition, together with treble damages. If the alleged conduct is to be either regulated or prohibited, whether under its stabilization rules or otherwise, that decision should be made by the Commission pursuant to its mandate under the federal securities laws. This is not to say that privilege revocation can never violate the federal securities laws or could not be part of a course of conduct that violates those laws. 4

A. The offer to the public of newly issued securities by securities broker-dealers, including activities intended to stabilize the price of recently sold securities, is pervasively regulated under the federal securities laws.

"Whenever claims of implied immunity are raised, they must be evaluated in terms of the particular regulatory provision involved, its legislative history, and the administrative authority exercised pursuant to it." Northeastern Telephone Co. v. AT & T, 651 F.2d 76, 83 (2d Cir. 1981). The offering of securities and the activities of securities broker-dealers in general, and activities intended to stabilize the price of newly offered securities, in particular, are subject to pervasive regulation.

Furthermore, the conduct of broker-dealers towards their customers is subject to extensive regulation under the Exchange Act, 15 U.S.C. 78a, etseq. The Exchange Act has a number of provisions explicitly addressing manipulation, a term which "connotes intentional or willful conduct designed to deceive or defraud investors by controlling or artificially affecting the price of securities." Ernst & Ernst v. Hochfelder, 425 U.S. 185, 199 (1976). Contrary to plaintiffs' suggestion (e.g., Br. 15), the Exchange Act does not prohibit all forms of conduct that affect or control the price of securities except those that are expressly permitted byCommission rule. Rather, it expressly prohibits certain common forms of such conduct, and grants the Commission rulemaking authority to regulate or prohibit other forms.

Section 9(a) of the Exchange Act, 15 U.S.C. 78i(a), is concerned with manipulation in securities listed on a national securities exchange. For instance, this Section declares it unlawful, with respect to a security registered on a national securities exchange, to employ such common manipulative techniques as making fictitious purchases, known as "wash sales;" or simultaneously purchasing and selling the same amounts of a security, known as a "matched sale," for the purpose of causing a misleading appearance as to the real nature of the market; or engaging in a series of transactions creating actual or apparent active trading or raising or depressing the price for the purpose of inducing the purchase or sale of such security by others. See Sections 9(a)(1) and (2) of the Exchange Act, 15 U.S.C. 78i(a)(1) and (2); H.R. Rep. No. 1383, 73d Cong., 2d Sess. 10 (1934) (House Report) (RA 1-32); S. Rep. No. 792, 73d Cong., 2d Sess. 15-16 (1934) (Senate Report) (RA 33-56); seealso Sections 9(a)(3)-(5), 15 U.S.C. 78i(a)(3)-(5) (prohibiting certain other forms of manipulation and deception in the offer and sale of securities registered on a national securities exchange).

Section 9(a) also authorizes the Commission to regulate transactions that are intended to stabilize the price of listed securities. After careful study, Congress concluded that "[t]he evidence as to the value of pegging and stabilizing operations, particularly in relation to new issues, is far from conclusive." House Report at 10. While there were "abuses undoubtedly associated with such manipulation," Congress decided to proceed cautiously by subjecting the practice to regulation by the Commission rather than abolition. House Report at 10, 21; seealso Senate Report at 8-9.5 The Commission was to be given authority "to prescribe such rules as may be necessary or appropriate to protect investors and the public from the vicious and unsocial aspects of these practices." Senate Report at 55.

To effect either alone or with one or more other persons any series of transactions for the purchase and/or sale of any security registered on a national securities exchange for the purpose pegging, fixing, or stabilizing the price of such security in contravention of such rules andregulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.

The Exchange Act also grants the Commission broad rulemaking authority to regulate or prohibit forms of price stabilization not covered by Section 9(a), including manipulation of unlisted securities. Section 10(b) of the Exchange Act, 15 U.S.C. 78j(b) declares it unlawful

To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.

Furthermore, Section 15(c)(1), 15 U.S.C. 78o(c)(1), outlaws manipulative conduct by a securities broker or dealer in transactions that do not take place on a national securities exchange. That provision prohibits brokers and dealers from using the means of interstate commerce or the mails to "effect any transaction in, or to induce or attempt to induce the purchase or sale of, any security [except certain identified types of securities] otherwise than on a national securities exchange of which it is a member * * * by means of any manipulative, deceptive, or other fraudulent device or contrivance," and it grants the Commission rulemakingauthority to define such devices or contrivances as are "manipulative, deceptive, or otherwise fraudulent." See Sections 15(c)(1)(A) and (D), 78o(c)(1)(A) and (D).

2. Commission exercise of its regulatory authority over stabilization.

a. Initial regulatory steps. The foregoing statutory provisions grant the Commission plenary authority to regulate stabilization -- or to refrain from regulating specific types of stabilizing conduct. As its first step in exercising that authority, in 1939 the Commission adopted Rule 17a-2 under the Exchange Act and then-Rule 426 under the Securities Act. See 9 Louis Loss and Joel Seligman, Securities Regulation (3d ed. 1992). These provisions required record keeping and disclosure with respect to stabilization, but did not impose any restrictions on the practice. Then, in 1940, the Commission adopted Rule X-9A6-1, which regulated stabilization of "at the market" offerings of exchange listed securities. 9 Loss and Seligman at 3993; SEC Rel. No. 34-2363 (January 3, 1940).

b.1940 Statement. Shortly after adopting Rule X-9A6-1, the Commission issued the "Statement of the Securities and Exchange Commission on the Regulation of `Pegging Fixing and Stabilizing' of Security Prices," SEC Rel. No. 34-2446 (March 18, 1940) (1940 Statement) ( RA 360-92). This comprehensivereview of the issues surrounding stabilization continues to be the foundation of the Commission's regulatory efforts in this area down to the present day.

The Statement began from the premise that stabilization by those involved in the offering has long been a part of the underwriting process, so that the question of how to deal with the practice "is an intensely practical problem which, for the present, must be solved in terms of the existing financial machinery" (1940 Statement at 1). The Commission explained that stabilizing facilitates firm commitment, fixed-price underwriting because it allows underwriters to reduce the risk that the price of the securities will drop before the underwriters have sold their entire allotment (1940 Statement at 3-6). On the other hand, stabilization creates the risk that the stabilized price is too high, so that "when the `peg is pulled,' the market price of the security frequently drops with ensuing loss to all who purchased it on the basis of the artificial, `pegged,' market price" (1940 Statement at 6).

The Commission described the arguments made by underwriters in favor of stabilization, despite these dangers (1940 Statement at 7-9), including the contention that downward pressure on the price can be exacerbated by "free riders" -- who today are called flippers -- speculators who purchase with the hope ofquickly selling out and taking a profit from an early rise (1940 Statement at 8). The Commission was of the view that it had to balance two potentially conflicting sets of interests: issuers, underwriters, and holders of existing securities were benefitted by any practice that facilitated raising capital through new issues, while the purchasers of these new issues did not want to buy overpriced securities (1940 Statement at 9-10).

The Commission concluded that the arguments in favor of stabilization had not been disproved, so it was not willing to ban the practice outright, yet the dangers of stabilization were so clear that it was also not willing to allow the practice to continue without regulation (1940 Statement at 10-13):

Under the Securities Exchange Act as it now stands, many forms of stabilizing, no matter how vicious, are lawful except to the extent that they may violate rules of the Commission or other provisions of law. * * * In the absence of regulation, stabilizing may be lawfully employed under many other circumstances where it is both ethically and economically indefensible (1940 Statement at 12-13).

The Commission determined to proceed cautiously, by targeted rulemaking. Rule X-9A6-1, it explained, had been the first step in that process. 6

c. In re NASD. The 1940 Statement was supplemented in important ways by the Commission's decision in In re NASD, 19 S.E.C. 424 (1945). In a thorough review of the underwriting process as well as of its authority to regulate stabilization and related price maintenance activity, the Commission made two points relevant to this case.7

First, the Commission discussed the practice referred to as a "repurchase penalty," which is now called a "penalty bid." Penalty bids are a contractual arrangement that permits the underwriting manager to reclaim certain underwriting fees (called "selling concessions") from syndicate members when the securities originally sold by the syndicate member are re-purchased by the manager. Penalty bids thus make it less profitable for syndicate members to sell public offering shares to customers who flip because the syndicate members will have to remit these fees. The Commission stated that its views of such price-maintenance provisions in underwriting contracts were "very much the same as our views on the`pegging, fixing and stabilizing of security prices'" as set forth in the 1940 Statement. 8 These price-maintenance provisions were not themselves transactions to stabilize prices, but they had stabilizing effects because they discouraged syndicate members from selling at below offering prices or from selling to those who would quickly sell into the market. Therefore, the Commission said, if it were faced with the "question of whether we should or should not prohibit the use of the price-maintenance provisions in question, we would reach the same conclusion that we did with respect to stabilization, i.e., that we should not prohibit such provisions." 19 S.E.C. at 443.

Second, the bonds at issue in the case were not listed on a national exchange, so the Commission reviewed the scope of its authority to regulate stabilizing conduct with respect to securities that were sold over-the-counter. It observed that "[w]hile Section 9(a)(6) applies specifically only to securities registered on national securities exchanges (which rarely include new issues being distributed) the Congressional pronouncement is significant as reflecting an intention in general toregulate rather than prohibit stabilization." 19 S.E.C. at 460-61. Based on its review of the legislative history and in light of its authority with respect to manipulation on the over-the-counter market under Section 15(c) of the Exchange Act, the Commission concluded that "Congress intended this Commission to consider all aspects of the stabilization problems, including stabilization of new issues of securities during distribution, and certainly our duties under other provisions of law extend to the regulation of stabilization in the over-the-counter markets." 19 S.E.C. at 461.

Thus, the Commission was of the view that it could adopt a set of regulations of stabilization in the over-the-counter market that were "as broad as those which might be adopted under Section 9 (a) (6)." 19 S.E.C. at 461. Furthermore, of course, the disclosure requirements of Rule X-17A-2 and the stabilization prospectus disclosure rule then in effect applied equally to listed and unlisted securities. 19 S.E.C. at 461. In other words, "[i]f, in expressly committing to our jurisdiction the regulation of stabilization in securities registered on exchanges, Congress thereby removed that problem from the scope of the Sherman Act, wecan observe no basis for reaching a different conclusion regarding stabilization of securities not registered on exchanges." 19 S.E.C. at 462. 9

d. Rule 10b-7. In 1955, the Commission for the first time adopted a rule formally regulating stabilization in both listed and unlisted securities. The provision, Rule 10b-7, codified principles that had been developed by the Commission and its staff in the years since Rule X-9A6-1 was adopted, and imposed certain requirements on any person who was stabilizing to prevent or retard a price decline in order "to facilitate an offering of any security." See SEC Rel. No. 34-5040 (May 18, 1954) (RA 393-400); SEC Rel. No. 34-5194 (July 5, 1955) (RA 401-15); 9 Loss and Seligman at 3999-4014. 10 Rule 10b-7 was adopted pursuant to both Section 9(a)(6) and Section 10(b) and, unlike RuleX-9A6-1, it applied to all offerings, not only those that involved listed securities. 11

The Rule defined stabilizing transactions as those involving "the placing of any bid, or the effecting of any purchase, for the purpose of pegging, fixing or stabilizing the price of any security." Among other provisions, the Rule prohibited bids or purchases not necessary for the purpose of preventing or retarding a decline in the open market price of the security, as well as stabilizing at a price resulting from unlawful activity. It also established rules for setting the stabilizing price and for conducting stabilizing purchases, and it required that notice be given when a market will be or is being stabilized.

Another practice common among underwriters which had the effect of limiting supply of stock in the after-market was the imposition of penalties on salesmen or customers if allotments of new issues were sold within a stated period after the offering date. 12 [The Commission offered examples of firms penalizing salesmen whose customers sold immediately after the offering date.] Some firms place restrictions not upon salesman but upon the customer. Firms "flagged" or identified customers who sold stock in the immediate after-market by reviewing the transfer sheets; those who sold were unlikely to receive allotments of subsequent oversubscribed issues.

Special Study at 525. The Study further reported that "[s]ome customers stated that they were told not to sell for varying periods, usually 30 to 60 days." Id. at 525-26. Though the Study made a large number of recommendations for statutory and regulatory changes, it did not recommend either a statutory or regulatory response to these practices.

f. 1994 manipulation concept release. In 1994, the Commission issued a concept release raising a broad range of issues and soliciting comments on the anti-manipulation rules applicable to participants in an offering, including those concerning stabilization. See SEC Rel. Nos. 33-7057, 34-33924; 56 SEC Docket 1302 (April 19, 1994) (Concept Release) (RA 419-447). The Concept Release observed that the United States securities markets had changed markedly since thelast comprehensive review of the Trading Practices Rules in 1983. 56 SEC Docket at 1304. Among the changes most relevant to the issue raised in this case was the increased "overselling" of offerings by underwriting syndicates, "resulting in increased aftermarket covering activity by underwriters, and a decrease in formal stabilization activity." 56 SEC Docket at 1306.

In addition to describing current issues arising with types of stabilization governed by Rule 10b-7 (56 SEC Docket at 1315-16), the Concept Release specifically addressed aftermarket activities that had the effect of stabilizing the price of newly offered securities:

Underwriters engage in numerous activities in the "aftermarket" of the offered security, i.e., the period following the cessation of sales efforts in the offering. In purpose or effect, these activities may support, or even raise, the market price of the security and can have the effect of "stabilizing" the security's price. In fact, "stabilization" of the market in connection with offerings may have shifted from the sales period to the aftermarket period.

A significant volume of trading frequently occurs in the days immediately following the end of the sales of the offered securities. Three significant activities by persons who participated in the distribution often occur during this period: market making; purchases of the offered security to cover a syndicate short position; and "penalty bids." * * *

A "penalty bid" provision often is included in the agreement among underwriters. The managing underwriter imposes the penalty by requiring underwriters or selling group members to forfeit their selling concession for the shares sold to their customers in the offering that are purchased in the aftermarket for the syndicate account.

56 SEC Docket at 1316-17.

As relevant to this case, the Concept Release asked the following questions in connection with these forms of aftermarket stabilization:

Do aftermarket bids and purchases by syndicate members support the market price of the offered security and "facilitate the offering"? 13

Should such bids and purchases be regulated?

Does the presence of a penalty bid have the effect of "stabilizing" the aftermarket of the offered security?

The Commission determined, however, not to propose regulations explicitly governing aftermarket activities intended to stabilize the price of newly offered securities, but instead to gather data on the extent and nature of certain of those activities in order to allow it to determine whether regulation is appropriate. The Commission observed that after-market stabilization may be an expected course of conduct by the underwriter to benefit both the issuer and investors:

Aftermarket Activities

An underwriter's interest in the success of an offering does not necessarily end with the completion of the sales efforts and termination of formal stabilizing activities, but can extend into the "aftermarket" trading in the distributed security (in general, the period immediately following the termination of formal syndicate activity --the so-called "breaking of the syndicate"). Aftermarket participation may be an expected part of the underwriting services provided to an issuer, and the anticipated quality of such services can influence the issuer's selection of a managing underwriter. Underwriters also have an incentive to provide "support" in the aftermarket to counterbalance pressure on the security's price from "flipping" and other selling activity that could adversely affect the investors who have purchasedin the offering. In addition, the managing underwriter often purchases shares in the aftermarket period to cover a syndicate short position. Accordingly, the point in time when underwriters no longer have the purpose to "facilitate an offering" cannot be identified with precision.

Furthermore, in initial public offerings the agreement among underwriters may contain a provision authorizing the managing underwriter to invoke a "penalty bid." This is a contractual agreement permitting the managing underwriter to reclaim the selling concession accruing to a syndicate participant with respect to shares that the managing underwriter purchases in the aftermarket to cover the syndicate short position. One of the primary objectives of a penalty bid is to encourage syndicate participants to sell the securities to those persons who intend to hold them rather than to engage in short-term profit-taking, i.e., to combat flipping. Enforcement of penalty bids typically continues for as long as 30 days.

The Commission believes that the aftermarket activities described above are not uncommon and may act to support the price of the offered security in the aftermarket. Commenters, however, were divided concerning whether regulation should be extended to cover such activities. Therefore, the Commission at this time is not proposing to extend the price limitations of Rule 104 to cover aftermarket activities. Instead, as described in the following section, the Commission is proposing to require disclosure of syndicate covering and penalty bid activities, and that underwriters keep records of such activities. Disclosure of these aftermarket activities would serve to apprize regulators of their possible market effects, while the recordkeeping requirements would assist the Commission in monitoring aftermarket practices and in assessing whether further regulation is warranted.

61 SEC Docket at 1739-40.

Regulation M as adopted followed the course suggested in the Proposing Release with respect to aftermarket activities that had the effect of stabilizing the price of the securities. SEC Rel. Nos. 33-7375, 34-38067; 63 SEC Docket 1141 (December 20, 1996) (Adopting Release) (RA 505-561). Specifically, "by providing for greater disclosure and recordkeeping of transactions that can influence market prices immediately following an offering, Rule 104 addresses the fact that underwriters now engage in substantial syndicate-related market activity, and enforce penalty bids in order to reduce market volatility in the market for the offered security." 63 SEC Docket at 1144.

Thus, after reiterating the view that "syndicate short covering transactions and the imposition of penalty bids by underwriters are activities that can facilitate an offering in a manner similar to stabilization," the Commission stated that it was adopting the proposed provisions relating to disclosure of aftermarket activities. Rule 104(h)(2) as adopted, 17 C.F.R. 240.104(h)(2), requires disclosure to a self-regulatory organization by any person effecting a "syndicate covering transaction," defined as the placing of any bid or the effecting of any purchase on behalf of the sole distributor or the underwriting syndicate or group to reduce a syndicate position, or placing or transmitting a "penalty bid," defined as an arrangement thatpermits the managing underwriter to reclaim a selling concession otherwise accruing to a syndicate member in connection with an offering when the securities originally sold by the syndicate member are purchased in syndicate covering transactions. Rule 100, 17 C.F.R. 240.100.

h. Approval of the initial public offering tracking system. In 1996, while Regulation M was under consideration, the Commission approved an automated certificate tracking system. Before the development of book-entry tracking of securities, syndicate managers used certificate numbers to determine which member of the syndicate had sold the shares in the offering that the manager subsequently purchased in the aftermarket. The Depository Trust Company's Initial Public Offering Tracking System allows shares to be tracked electronically during the offering and for some time thereafter, thus permitting managers to make that determination in a book-entry environment. In the order approving the system, the Commission explained that DTC was implementing the tracking system "to allow lead managers * * * to monitor `flipping' of new issues," and observed that the manager "may wish to identify flipped transactions so that the underwriting concession * * * can be recovered from the appropriate syndicate members." SEC Rel. No. 34-37208, 61 SEC Docket 2365, 2365-66 (May 13, 1996) (RA 498-504). In response to the objection that the system allowed managers to collect too much information, the Commission noted that any use of the information "would need to be consistent with federal securities laws in effect at the time, including, if adopted, recent proposals designed to address concerns about post-offering activities by underwriters [i.e., Regulation M]." 61 S.E.C. Docket at 2370.

The foregoing review of the statutory and regulatory regime applicable to stabilization of securities prices demonstrates that Congress has delegated to the Commission comprehensive authority, and that the Commission has carefully considered and exercised that authority in the area of stabilizing conduct for more than 60 years. The Commission has determined not to extend that stabilization regulation specifically to prohibit privilege revocation. Under these circumstances, a claim for violation of the antitrust laws based upon plaintiffs' allegations that certain forms of aftermarket activities are stabilization disregards the regulatory regime, creating a "clear repugnancy between the antitrust laws and the regulatorysystem." Repeal of the antitrust laws is "necessary to make the subsequent law work." 14

The Supreme Court's decision in United States v. NASD, 422 U.S. 694, is directly on point. The Court considered whether antitrust immunity was created for certain resale restrictions imposed by mutual funds by a provision of the Investment Company Act that prohibited mutual funds from imposing restrictions on transferability and negotiability of mutual funds "in contravention of such rules and regulations as the Commission may prescribe * * *." 422 U.S. 721 n.33, quoting Section 22(f) of the Investment Company Act, 15 U.S.C. 80a-22(f).

The Court found immunity even though the Commission had never adopted any regulations governing such restrictions. 422 U.S. at 720-30. The Court'sreview of the Commission's discussion of the challenged practices over a period of 30 years, including the description of the restrictions in the Special Study, 422 U.S. 728 n.40, persuaded it that the Commission's failure to act was not an "abdication of its regulatory responsibilities," but was instead "an informed administrative judgment" that the restrictions were "appropriate means for combating the problems of the industry," and they were "precisely the kind of administrative oversight of private practices that the Congress contemplated when it enacted Section 22(f)." 422 U.S. at 728. Consequently, there could be "no reconciliation" of the Commission's "authority under Section 22(f) to permit" the restrictions "with the Sherman Act's declaration that they are illegal per se." 422 U.S. at 729.

As noted above, the Commission has long known of the existence of privilege revocation, but in an important sense the case for immunity here is much stronger than it was in the NASD case. The Commission has not only shown an awareness of stabilization practices, it has repeatedly adopted and revised regulations governing various aspects of that practice, banning certain activities and permitting others subject to regulation. It has also expressly decided not to enact regulatory provisions restricting aftermarket activities, instead requiring disclosure and record keeping by offering participants to allow it to determine inthe future whether further regulation is appropriate. The Commission's choice not specifically to prohibit or regulate privilege revocations as stabilization against the background of this active regulation speaks compellingly in favor of the need for repeal of the antitrust laws.

We agree with plaintiffs (Br. 16) that this Court's decision in Strobl provides useful guidance, but we believe plaintiffs misread that case, which arose under the Commodity Exchange Act. This Court found that the antitrust laws could be applied to a conspiracy to manipulate prices of commodities because under the commodities law, there was no "built-in balance in the regulatory scheme" of the Commodity Exchange Act that "permits a little price manipulation in order to further some other regulatory goal;" instead, "price manipulation is an evil that is always forbidden under every circumstance" by both the commodities law and the antitrust laws. 768 F.2d at 28. As noted above, the situation under the Exchange Act is radically different. The Commission has consistently recognized, quite explicitly, that there is a "built-in balance in the regulatory scheme," and one could fairly say that the Exchange Act contemplates that the Commission may decide to"permit a little price manipulation in order to further some other regulatory goal."15

Plaintiffs intimate (Br. 27 n.12) that the Commission's choice not specifically to prohibit privilege revocations cannot possibly be justified on public interest grounds. This very argument underscores the importance in this case of finding implied repeal of the antitrust laws. The proper evaluation of the public interest in this context has been entrusted by Congress to the Commission, subject to judicial review in accordance with the Exchange Act, not to plaintiffs via an antitrust class action. Even if a regulator misinterprets or misapplies a statute that it administers, the antitrust laws are not an alternative channel for reviewing administrative actions, under which those who disagree with the agency's decision may bring an antitrust action and subject regulated entities to treble damages if the court in the antitrust case ultimately agrees that a particular administrative determination was erroneous under the governing regulatory statute.

Plaintiffs also err when they assert (Br. 18) that the Commission did not take competitive issues into account in its regulation of stabilization. We note that an argument of this tenor was made by the dissenters in the Supreme Court's NASD decision, but it was rejected by the majority, which observed that the Commission had long stated that it took competitive considerations into account, 422 U.S. at 732-33. Furthermore, the Exchange Act has been twice amended since the NASD decision to require the Commission to consider competitive effects in adopting its rules and regulations. 16 In compliance with that explicit statutory directive, the Commission in adopting Regulation M found that the regulation "will not likely impose any significant burden on competition not necessary or appropriate in furtherance of the Exchange Act." 63 S.E.C. Docket at 1173. This conclusion must be applied to the entire scope of Regulation M, both the decision to subject certain conduct to prohibition or regulation, and also the decision not to extend the regulation further.

Plaintiffs claim that "latent jurisdiction and pervasive regulations do not without more immunize from antitrust consequence" (Br. 30), and "conscious neglect does not without more immunize from antitrust consequence" (Br. 32). These assertions are invalid. Whatever force they might have if the Commission had abdicated its regulatory responsibilities in a particular area, they do not apply here. Plaintiffs seem to contend that conduct is permissible only if the Commission has adopted a regulation specifically permitting it, but that conclusion is contrary to the language of the relevant statutes, and it would give the Commission the impossible task of not only identifying every type of stabilizing conduct that it is regulating, but also of exhaustively listing all the sorts of stabilizing conduct that it is not regulating, and even of anticipating the development of new practices. As previously shown, the Commission has not chosen specifically to bar or regulate it. That is not "conscious neglect;" it is considered policy.

Similarly to the Court's conclusion in Gordon with respect to fixed commission rates, the securities laws were intended by the Congress to leave the regulation of stabilization to the Commission, so that the interposition of the antitrust laws, which plaintiffs allege would bar those stabilizing activities as per se violations of the Sherman Act, in the face of the Commission's long consideration and active regulation of stabilization, would adversely impact and indeed could well undermine the operation of the securities laws as intended by Congress and as implemented through Commission regulatory activity. Therefore, implied repeal isnecessary in this case to make those laws work as they were intended because failure to imply repeal would render nugatory the legislative provision for regulatory agency supervision of stabilizing activity.

CONCLUSION

For the foregoing reasons, the decision of the district court that the challenged conduct is immune from antitrust challenge should be affirmed.

Plaintiffs suggest that overallotment shares are sold at a different point in time from the rest of the offering. However, the overallotment shares are sold fungibly with the other offering shares, and so there should be no sales of any offering shares during the Retail Restricted Period.

See Preliminary Note to Regulation M, 17 C.F.R. 240.100 ("Any transaction or series of transactions, whether or not effected pursuant to the provisions of Regulation M * * * remain subject to the antifraud and antimanipulation provisions of the securities laws"). The point is that the decision whether stabilizing conduct is permitted, under either a regulation that specifically addresses stabilization, or one that broadly addresses fraud, manipulation, or some other activity, should be made pursuant to the securities laws and the securities regulatory regime administered by the Commission.

The statute thus draws a distinction between transactions engaged in for the purpose of raising or lowering the price, which are defined as a form of unlawful manipulation, and transactions intended to stabilize the price, which are permitted so long as they do not violate the securities laws or Commission regulations.

The Commission was reviewing an NASD decision imposing sanctions on a number of underwriters that had sold bonds in a slow-moving issue at prices below the syndicate offering price. These sales were contrary to the underwriting agreement, and the question decided by the case was whether such sales violated the NASD's rule requiring members in the conduct of their business to "observe high standards of commercial honor and just and equitable principles of trade." The Commission held that the sales did not violate NASD's rules, 19 S.E.C. at 436-46.

The underwriting contract at issue in the case authorized the syndicate manager to withhold the selling concession for any bonds that it repurchased in the open market at or below the initial offering price. 19 S.E.C. at 426-27. The Commission further reviewed the function of penalty bids, referred to as "repurchase penalties," in its discussion of the application of the antitrust laws to underwriting agreements. 19 S.E.C. at 454-55.

[t]he specific antimanipulative provisions in Section 9 of the Act were applied only to securities registered on exchanges because, in 1934, it was felt in Congress that not enough was known of the over-the-counter markets and it was decided to handle the problem of regulating them through a general section of the statute giving this Commission broad rule-making powers. 19 S.E.C. at 462.

Recall that Section 10(b) authorizes the Commission to adopt rules and regulations addressing manipulative conduct with respect to both listed and unlisted securities. Rule 10b-7 also prohibited stabilizing of any offering "at the market," the conduct regulated by Rule X-9A6-1. The Commission therefore repealed Rule X-9A6-1 at the time it adopted Rule 10b-7.

This case therefore contrasts with the position urged by the Commission in In re Stock Exchanges Options Trading Antitrust Litigation, 2001 U.S. Dist. LEXIS 1381 (S.D.N.Y. February 15, 2001). There, the Commission contended that there was no immunity for conduct that the parties conceded was expressly prohibited by a Commission rule that had been adopted upon the Commission's determination that the conduct in question was anti-competitive and not otherwise justifiable. In contrast, the Commission continues to regulate stabilizing activities in light of its obligation to balance competition and other public policies. (The district court in the Options case rejected the Commission's position and found immunity. The case is on appeal. The Commission currently lacks a quorum respecting this matter, see 17 C.F.R. 200.41. It has therefore not authorized the filing of a brief amicuscuriae in the appeal in that case.)

The Commission anticipated this distinction as early as 1945 in In re NASD, 19 S.E.C. at 462: "In the light of these Congressional policies of recognizing fixed-price distributions with fixed allowances and discounts, and of committing stabilization practices to our regulation, the decisions dealing with price-fixing and price-maintenance in other commodities under the Sherman Act must obviously be read with caution."